In retrospect, there is ample evidence that an active retirement ecosystem effectively bringing together the actors – a regulator, administrators, custodians, public and private sector employers, and working class people of multiple age groups – is good. established in Nigeria. The maturity of this industry compared to more advanced economies in the world such as the United States or the Organization for Economic Co-operation and Development, nevertheless, the pension industry overall has shown great resilience, navigating the turbulence. and the whirlwinds: macroeconomic shocks, economic downturns, recession and more recently a global pandemic in 2020, which caused a downturn in businesses, job losses and a sharp drop in macroeconomic numbers and indices. Despite periods of passive economic activity, the pension sector has, over time, consistently helped mobilize much-needed funds, especially from the middle-income segment of the economy to propel growth.
According to the National Pensions Commission, at the end of 2020, the same year that the COVID-19 pandemic raged severely, leading to negative economic growth of two quarters, retirement assets in Nigeria reached N12.3 trillion. . This amount represents 8% of Nigeria’s nominal gross domestic product. There were only a handful of industries that posted an equally stellar performance for the year.
More recently, PenCom also noted that the records of retirement savings accounts since inception reached 9,383,204 as of June 30, 2021. This was marked by a growth of 9,300,058 recorded in the first quarter of 2021. In l Taken together, cumulative pension contributions from inception through the end of the second quarter of 2021 amounted to N7.10 trillion.
While these numbers seem impressive at first glance, they still do not give a true picture of the capacity of the sector. This is because only 11% of the total working class population are active on Nigeria’s contributory pension scheme. This is a low penetration rate compared to 19% in South Africa and 77% in the UK. We could only imagine the enormous funds that could be mobilized for investment and, indeed, growth if coverage could extend to only half of the working class population in Nigeria. It also portends that there are huge prospects in this industry with a predictable ability to lead the quest for sustained economic growth in Nigeria, thanks to the two main policy instruments available to the government – fiscal and monetary policy. I am confident that the pension sector, if properly nourished, is poised to rank among the next three major industries to lead the growth and development of the Nigerian economy over the next two decades, alongside industry and agriculture.
Since 2004, when the first pensions law was enacted, there are now 22 pension fund administrators in total, six closed pension fund administrators and four pension fund custodians in Nigeria.
With the Pension Reform Act of 2014, which repealed the provisions of the law of 2004, clearly distilled the roles of each actor, including receipt of contributions, custody, investment and regulation, there is now a rule of well-detailed engagement in the industry. The goals have always revolved around the safekeeping of pension assets, the inclusion of contributors, adherence to best practices, risk management and economic growth.
However, a dynamic retirement system adapted to a still dynamic macroeconomic environment is necessary. The arguments in favor of a more flexible system, in line with the demands of the immediate financial market and the economic environment, are sought.
Foremost among the challenges plaguing the industry has been poor coverage and compliance by employers, including state governments, who are also part of the scheme as detailed by section 2 of the 2014 Public Reform Act. , which stipulates that the law on pension reform applies to all employment in the public service of the federation, the public service of the Federal Capital Territory, the state civil service, the local government civil service and the sector private. For private sector employees, section 2 (2) applies to employees who are employed by an organization in which there are 15 or more employees.
The compensation for mobilizing funds in the contributory pension scheme is well specified in Article 4 of the law: a total of 18% of the monthly fee is to be paid into the Retirement Savings Account of an employee with “a minimum of 10% payable by the employer and up to a minimum of 8% by the employee â.
Sadly, compliance with these provisions and guidelines by the public and private sectors has been low. At the end of 2020, only Lagos State, Ondo State and the FCT were in full compliance with their national pension laws. A host of other states have found solace in operating a morbid âpay as you goâ system. It is also outside the millions of informal sector employees excluded from the regime in the private sector.
Limitations in awareness, knowledge and education of the functioning of the pension system, especially by employees and beneficiaries, are always at their lowest. Ideally, regulators, custodians and administrators should lead a worthy advocacy charge in the formal and informal sectors.
While the strict application of the law on pension reform as a means of exponentially increasing the funds mobilized has always been put forward by economic analysts, the mode of application and sanction for companies and offenders is essential. At the very least, regulators should immediately consider synchronizing the application of pension funds with the country’s national identity management system and reviewing the application at the time of annual financial reports by companies and Industries.
As with the mobilization of contributions from employers and employees, the law on pension reform grants an allowance for the investment of these funds in order to allow owners – employees and custodians – to derive a return.
An important question to ask is “what drives the allocation and investment of pension funds by custodians and administrators?” I have found that in many climates, risk, return, and cost of funds are paramount among the key considerations in pension fund investing. Others include diversification, risk management, inflation hedging and liquidity.
According to figures for the second quarter of 2021 released by the National Pensions Commission, the four main instruments in which total pension assets of 12.66 trillion naira have been invested are federal government securities (66%), securities local money market (13.72%), corporate debt securities (7.51%) and domestic common stocks (6.66%) in that order. The bonds of the First Bank of Nigeria took a large part of the percentage of investment in federal government securities, while bank investments made up the largest share of local money market securities.
- Peter Imouokhome is an economist and development expert; can be reached on [emailÂ protected]
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